* Ukraine forces kill up to five rebels; Russia starts drill near border
* Libya rebels warn Tripoli oil ports to stay closed unless deal implemented
* Surplus global oil output capacity rises in March, April -EIA
* Brent may retrace to $109.70 -technicals
By Manash Goswami
SINGAPORE, April 25 (Reuters) - Brent futures held near seven-week highs above $110 a barrel on Friday as escalating tensions over Ukraine between top oil producer Russia and the West worsened supply disruption fears.
Ukrainian forces killed up to five pro-Moscow rebels in what amounted to the first use of lethal force to recapture territory from the fighters, with the United States accusing Russia of trying to destabilise the region.
Yet, further gains in oil were capped after a U.S. government report said the amount of oil that producers can quickly bring on line rose slightly.
Brent crude, set to post a third week of gains - the longest streak since one that ended in early September - rose 2 cents to $110.35 a barrel by 0406 GMT, after settling up $1.22.
U.S. oil increased 7 cents to $102.01, after ending 50 cents up.
"There was use of military aggression by Ukraine against pro-Russian rebels and that has helped prop up prices," said Tan Chee Tat, investment analyst at Singapore's Phillip Futures. "The escalation in the crisis is sparking off the rise in oil."
U.S. Secretary of State John Kerry suggested that the United States is drawing closer to imposing more sanctions on Russia by saying time was running out for a change in course. Moscow in turn demanded the United States force the Ukrainian authorities to halt its military operation, putting the onus on Washington to ease tensions.
The unfolding crisis would keep Brent supported between $105 and $110 a barrel and the U.S. benchmark above $100 a barrel, Phillip Futures' Tan said.
Oil, particularly Brent, is also drawing support from the repeated hiccups in Libya's attempts to boost exports.
A rebel group in the country's east that controls several ports said on Thursday it would not reopen the Ras Lanuf and Es Sider terminals unless the Tripoli government implemented its part of a deal to end the oil blockade.
In addition, an improving economic outlook after a stumbling start to the year for top oil consumer the United States helped put a floor under prices.
Orders for long-lasting U.S. manufactured goods rose more than expected in March and a measure of business capital spending plans surged.
"It is not realistic to expect a full series of positive numbers," Phillip Futures' Tan said. "Despite some recent weak numbers, there is growing evidence that the U.S. economy is improving and the outlook is getting better."
However, the supply outlook for oil has also improved.
A report by the Energy Information Administration (EIA) showed global surplus oil production capacity, an important factor influencing world crude prices, averaged 2.1 million barrels per day in March and April.
The extra capacity level was up 200,000 bpd from the average for January and February. (Editing by Tom Hogue)